The Internal Revenue Service (IRS) designates a freelancer as an independent contractor or self-employed worker. Essentially, any job you do for anyone as a non-employee falls under the definition of freelance work. This is defined as someone who earns wages on a per-task or per-job basis. Typically, freelance work is short-term work. However, the work can be ongoing and continue over the long term. Gig workers are an example of freelance workers.
As independent contractors, freelance workers are usually responsible for deducting and paying their own state and federal taxes from their wages. Additionally, freelance workers typically do not receive benefits similar to employees such as sick leave, health insurance, or retirement plans.
Freelance workers may work in a variety of scenarios: On the premises of a brick-and-mortar business in a traditional workspace, or work from home, at a job site, or even traveling to various locations. Freelancers may also have set or flexible work schedules or delivery deadlines.
Many people prefer working as a freelancer as it not only can allow a flexible work schedule, but it allows them to achieve a preferable work/life balance.
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The BIGGEST Mistake Freelancers Make
The biggest mistake freelancers make is not having a written agreement or contract that outlines the scope of the work to be performed and the compensation.
Oral agreements or agreements sent back and forth through a chain of emails or texts, might seem far simpler, but it’s leaving both the freelance worker and the client unprotected.
The terms of oral agreements are notoriously difficult to prove, even though, technically, they are legally binding. They certainly are more difficult to enforce in court if something goes wrong.
Written agreements don’t have to be difficult, long, or tedious. In the following sections, we’ll cover the basics you need in a written contract as a freelancer. You can even find some boilerplate, fill-in-the-blanks freelance contracts for free online that you can customize to suit your needs. As long as you’ve included the most essential parts of the contract, you, and your client, will be much better protected than oral or email agreements.
The bottom line is: DO NOT do any freelance work without a contract. ALWAYS ask for or provide a contract before doing any freelance work.
Why Not Having a Contract Puts You at Risk
Any freelance work you begin without a contract puts you at risk on many levels. Here are some things that could go wrong.
- The client can change deadlines or timelines.
- the client can change the scope of the work, either adding to it or diminishing it.
- The client can manipulate or steal your work.
- The client can change the payment terms, including times and amounts.
- The client can express a difference of opinion about any aspect of the work or compensation.
- The client can abruptly end the project, earning you less than expected, or not paying you at all.
- The client can sue you claiming different expectations than those you agreed upon.
Why You ALWAYS Need a Freelance Work Contract
A freelance work contract is a legal contract that outlines the terms and conditions between an independent contract and the client. The client may be an individual or business. The freelance work contract specifies that the individual or business is purchasing the services of the independent contractor.
The important stipulations of a freelance work contract are:
- Stipulates that the contract legally binds the client and the independent contractor to its terms.
- Outlines the responsibilities of the independent contractor and the client.
- Specifies and clarifies terms such as payments, timelines, and deliverables.
- Because the terms are specified, a contract reduces disputes and differences of opinion.
- A contract safeguards the rights of the freelance worker (independent contractor).
- A contract protects the freelance worker and their work from being manipulated or stolen.
The Most Essential Terms to Include in Your Freelance Contract
While each freelance contract can be unique to a given project, some essential terms, conditions, and clauses should be included in any freelance contract.
Luckily, you don’t necessarily have to hire an attorney to create a contract for every freelance job. Some freelance work wouldn’t justify this kind of expense. However, there are online legal sites that sell lawyer-approved generic independent contractor or freelance contracts that can be edited and modified to suit your needs. You may also be able to find free boilerplate, and fill-in-the-blanks contracts online that you can use and alter.
Once you find a contract you like and can be modified to suit your needs, you can use that as a template for future freelance work. You can repurpose the contract and adjust it to fit the requirements of each particular freelance job.
No matter what type of freelance contract you ultimately use, make sure – at a minimum – your contract includes the following essential terms.
1. Your Name and Personal Information
Include your legal name and/or your business name and then your legal name as a representative of your company. Include contact information such as address, telephone number, and email address. Use your legal and/or legal business name as it is used on your tax returns.
2. Client’s/Business’s Name and Information
Include the name of the individual and/or business and company representative that will be your client. Make sure to specify the person who will be your primary contact throughout the project.
Include contact information such as address, telephone number, and email address. Use your legal and/or legal business name as it is used on tax returns. If your client has a physical business address, make sure to use that and not their residential address (unless it is the same).
3. Overview and Scope of Project
An overview of the project is simply one to two sentences that specify the freelancer, the services being rendered, and who will be the recipient of those services. This will serve as an introduction to the scope of the project, which will go into the essential and specific details of the work to be performed and agreed upon.
When you create the scope of the project it’s crucial to describe the exact working terms. It can be important to describe both what the freelancer will be responsible for, as well as what they won’t, and the client’s responsibilities.
Essential Elements the Project Scope Should Include
- The starting date of the project.
- The timeline of the project.
- A detailed description of what services will be provided.
- The end date of the project.
- The payment terms: Schedule (the dates when the client will pay and in what increments), and rate of pay (how much the client will pay).
4. Project Deliverables
Project deliverables are a schedule that specifies which services the freelancer is providing to the client. In other words, a specific task or part of a job that is expected and when it will be completed. What defines a deliverable will be unique to each project. A project deliverables schedule also sets the dates for when these deliverables must be completed at the various stages of the project. The outcome of the project is also a deliverable.
For example, let’s say you are building a custom shed for someone. (*This hypothetical timeline may not be accurate). The deliverables schedule might look something like this:
- Week 1: Planning and designing, obtaining permits (if required), gathering materials and supplies.
- Week 2: Prepare the ground, install the foundation or base, and ensure proper drainage away from the shed.
- Week 3: Frame the shed.
- Week 4: Install roofing, and add doors and windows (if desired).
- Week 5: Add electrical (if desired), install insulation and drywall (if desired), paint interior and exterior (if desired), and install doors and hardware.
Milestones
An alternative to the weekly-based example above is to have your contract specify “milestones.” These establish the parameters of what defines each phase of a project as completed, as well as the project as a whole.
For example, if you work as a writer and you are creating an instructional book or using a new company product, the milestones might look like this:
- Outline of book contents completed.
- Outline approved, First draft completed.
- Client returns first draft markup with suggestions, edits, or editing requests.
- Final draft completed.
5. Project Deadlines
Deadlines are an essential part of any project, as they set the times for deliverables and the project as a whole.
When working out deadlines, it is important to determine how much time each task will take to complete. Try to assume the worst so that you don’t put yourself in an impossible situation. Unforeseen things can happen, such as delays in supplies, emergencies, illnesses, injuries, and accidents. Make sure to allow extra time to account for the unexpected.
Conversely, you must also specify what happens if you miss a deadline. Again, automatically building in some “padding” of a few days for yourself with deadlines will help you avoid missing them.
6. Revision Limits
If you don’t specify limits, a client can request changes repeatedly. This can result in you doing far more work than agreed-upon. This is called “scope creep” and can cause you to lose money.
Therefore, your contract must have very clear stipulations regarding how many revisions a client is entitled to under the initial fee and scope established at the outset. Specify that revisions beyond the set limit will accrue additional costs and at what rate.
Specify the length of time a client has to inform you of any revision. Detail what happens if a client’s request for changes occurs outside of the agreed timeline. For example, if a client comes back and requests changes three days beyond the deadline for feedback.
Revisions should also extend deadlines by whatever amount of time the revisions take. For example, revisions that take two days would extend all deadlines by two days.
7. Intellectual Property Rights
Intellectual property rights are extremely important to freelance workers who produce various types of creative work. These workers include artists, writers, designers, photographers, engineers, musicians, and more. These independent contractors often are hired to develop creative works from scratch. Some of these works may be considered intellectual property and subject to copyright. This brings up the problem of who owns the intellectual property rights.
The subject of intellectual property rights can be best understood through consulting with an attorney specializing in a particular area of creative works. However, there are some concepts freelancers who deliver creative works need to be familiar with.
Work For Hire
If you specify in your contract that the deliverables in your contract are “work for hire,” it means that the ownership of your finished creative work belongs to a third party (your client) rather than you, the creator. A work-for-hire will give your client the intellectual property rights for your finished work.
Limited Rights and Licensing
Limited rights offer better protection for the freelancer, especially if the client doesn’t pay.
One type of limited rights is to give your client a “license” to use your creation in a specific way.
For example, let’s say you are an artist. You grant the client the right to use your creation on their website and in online advertising campaigns. However, you also specify that this right does not extend to any other types of usage. They can’t put your artwork on T-shirts and hats and start selling them. They can’t use your artwork in a TV commercial. To do any of those, they would have to come back to you and negotiate compensation for that usage.
You should also have a clause that specifies that if the client fails to pay you, they lose the license to use any material you’ve created for a specified usage that they have not paid for.
8. Terms of Payment
How much and when you will get paid is a matter of negotiation and will vary between projects.
The first part of the terms is the price. Determine how much and whether you will be paid hourly, per project, or a retainer fee.
Don’t undervalue your work. Work at least for the going rate, or more if the quality of your work justifies a higher amount. When determining your rate, remember that employers don’t have to pay Social Security taxes, Medicare taxes, insurance, sick time, and other benefits to contract workers. Working freelance imparts these extra costs on you. Freelance work typically demands a higher rate of pay.
Next comes when you will be paid. In the simplest of contracts, a job maybe half of the total amount up front and the balance at completion.
However, on more lengthy and detailed jobs, it may be preferable to receive incremental payments. These too can vary. They can be based on deliverables, or with very long or ongoing projects, they can be paid weekly, biweekly, or monthly.
Both you and your client may have considerations when it comes to risk. For example, if you collect half upfront and half on completion, you run the risk of putting in all the work and only collecting half the money. Conversely, your client pays half the money trusting that you’ll do at least half of the work.
Factors to Consider When Establishing Payment Terms
- Will your rate be project-based or hourly?
- Will charges be based on a minimum or maximum number of working hours?
- Will you be paid for each deliverable? Or will payments be made at a specified interval after submitting an invoice?
- Do you want the client to pay you a deposit before you start the project?
- Will a late fee be imposed on your client if they fail to pay on time?
- Is the client responsible for reimbursing you for project expenses?
- What will the method of payment be? Check, cashier’s check, cash, wire transfer, or online payment service, such as PayPal.
9. Termination Clauses
Even starting with the best of intentions, sometimes the relationship between a freelancer and a client doesn’t work out. For this reason, it is also essential that your contract offer an accepted way to allow both parties to end the agreement.
Reasons to Terminate a Contract
There are several acceptable reasons for terminating a contract that should be accounted for. These can include failure to meet deadlines, a communication breakdown, disagreements about deliverables, or shortcomings on either side. The circumstances under which services can be discontinued should be explicitly stated in your contract.
Kill Fees
A termination agreement should also include a clause for “kill fees.” For example, the client changes plans and cancels the project. Or the client fails to return feedback or pay you for work you’ve completed.
Kill fees specify that you will be compensated for any work that you have already produced during the length of the project, regardless if the contract has been terminated. It entitles you to payment for services rendered and gives you documentation of such an agreement if you have to take your client to court to collect.
Freelance Work and Taxes
While freelance work adds flexibility, it comes with the burden of additional taxes. Employees have the benefit of their employer paying 50% of their Social Security and Medicare taxes. But as a freelancer, the full responsibility of those taxes falls solely on the independent contractor.
A freelance worker is subject to paying the full amount of their self-employment tax, currently 12.4%. When you are an employee, your employer typically pays 50%, or 6.2%, of this amount.
In addition, there is a 2.9% Medicare tax, of which an employer would typically pay 50%, or 1.45%. But as a freelancer, you’ll pay the entire 2.9% Medicare tax.
In addition to state and local taxes, the addition of paying the full amount of Social Security and Medicare tax for freelancers adds a total tax of 15.3%. This is a total of 7.65% more in taxes than you would pay as an employee.
Any freelancer earning $400 or more in a tax year is subject to self-employment tax.
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Tax Benefits of Freelance Work
While you will pay 7.65% more in taxes as a freelancer than as an employee, there is some good news tax-wise when it comes to being an independent contractor.
Self-employed workers may qualify for numerous tax deductions they can claim as business expenses. Many of these deductions are not available to employees. These deductions may offset the cost of the additional Social Security and Medicare taxes, and then some.
According to the IRS, these business expenses must be ordinary and necessary for the operation of your self-employed business.
For example, typical expenses would be home office expenses. If you work at home, you deduct up to 25% of the area of your home as your “home office.” You could apply that percentage to utilities, maintenance, and repairs of your home that are directly related to your business.
Office supplies and any supplies necessary for operating your business would also be deductible. If you use a vehicle for your work, you can deduct vehicle maintenance expenses, registration and emissions testing, mileage, and repairs.
You can also deduct the costs of traveling to a job or entertaining a client. Educational costs such as books, courses, or certifications that are directly related to your business or profession are also deductible.
It is wise to work with a tax professional to get advice on what deductible expenses are legitimate. You should also seek professional tax help in preparing your tax returns for your self-employed business.
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